addressing governmental cash flow difficulties due to ... · •the actual cumulative cash flow...

© 2020 Greenberg Traurig, LLP 2

Presenters

Sergio

MasvidalManaging Director

PFM Financial

Advisors LLC

Vanessa

Albert LowryShareholder

GT Philadelphia

Rebecca

HarrigalShareholder

GT Philadelphia

© 2020 Greenberg Traurig, LLP

• Overview: Existing Challenges for Governments

• Review: TRANs what they are and applicable rules

• Definition

• Regulations and Governance

• Applicability and Examples

• Review: Additional TRAN Liquidity through the Municipal Liquidity Facility

• Definition

• Eligibility and Applicability

• Purchase Amounts and Examples

Agenda

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• Problem - State and local governments (“Issuers”) facing delays and reductions in taxes and other revenue, and increased costs, may be experiencing cash-flow difficulties

• Possible Solution - Code permits Issuers to finance temporary cash flow shortfalls on tax-exempt basis

• Tax and Revenue Anticipation Notes (TRANS)

• Tax anticipation notes – TANs

• Revenue anticipation notes – RANS

• Additional Liquidity for TRANs - Federal Reserve through the use of the Municipal Liquidity Facility is acquiring certain TRANS

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Introduction

Understanding

the Potential of TRANs


• In any given year, an Issuers’ taxes and other revenues may not be received in time to match Issuer expenses

• TRANs address this mismatch by allowing the Issuer to borrow at a tax-free rate to pay expenses until tax and/or other revenues are received

• Some issuers use TRANsannually

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TRANs: Purpose


TRANs: Purpose

• TRANs have a more important role to play amid COVID-19

• Assist with increased or new cash-flow difficulties

• Philadelphia reported a drop of 47% in tax revenue in April, partially due to delayed tax payments

• May see easier issuance now with the Municipal Liquidity Facility

• Provides federal funds to acquire certain TRANs and similar short-term obligations

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• IRS Code imposes restrictions on tax-exempt obligations

• For TRANs

• Issuers may use TRANs to finance working capital needs

• Issuance must be appropriately sized for working capital needs-discussion points

• Proceeds-Spent-Last Rule

• Overissuance

• Investment and Expenditure Restrictions

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TRANs: Applicable Rules


• Proceeds-Spent-Last/Cumulative Cash Flow Deficit Rule

• This rule instructs Issuers on how to apply other rules- the arbitrage and overissuance rules

• It is an ordering rule for obligations issued to finance working capital expenditures

• Generally, proceeds of tax-exempt obligation are treated as “spent” after all other available sources for working capital purposes have been spent

• Understanding this rule is essential to properly sizing a TRANsissue and for applying the investment and expenditure rules

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• Proceeds-Spent-Last/Cumulative Cash Flow

Deficit Rule (cont’d)

• Rule is applied by looking at current fiscal year’s:

• Expected revenues to be used for working capital

• Expected working capital expenses

• Carryover revenues from the prior fiscal year

• Reasonable working capital reserve-generally 5% of prior fiscal year’s actual expenses

• Cumulative surplus/deficit is computed at various points in fiscal year to determine largest deficit expected for fiscal year and the timing of that deficit

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• Proceeds-Spent-Last/Cumulative Cash Flow Deficit Rule (cont’d)

• Prior year carryover-Cumulative cash flow surplus from prior year

• Expected revenues-Identify all expected revenues to be used for working capital purposes and when those revenues are expected to be received

• Proceeds from TRANs are disregarded

• Expected expenses-Identify all expected expenses for the fiscal year and when those expenditures are expected to be paid

• Sinking fund deposits to pay TRANs are disregarded

• Carryover the surplus/deficit from each computation period to the next computation period to determine the cumulative for the year

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• Reasonable working capital reserve

• Generally, 5% of prior fiscal year’s actual expenditures

• Hold the thought-Working capital reserve is not permitted to be excluded when applying the TRANs rebate safe harbor

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• Proceeds-Spent-Last/Cumulative Cash Flow Deficit Rule (cont’d)


• Overissuance Rule

• Purpose – Ensure obligations are not issued sooner, are not issued in an amount larger, and do not stay outstanding longer, than needed for the governmental purpose

• If this rule is violated the obligations may be taxable obligations

• Facts and circumstances test but generally, TRANs that are treated as spent within the permitted yield restriction temporary period will not violate overissuance rules

• Again, Proceeds-Spent-Last Rule applies for determining whether the temporary period is met

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• Arbitrage-Investment and Expenditure of Proceeds

• Two independent arbitrage rules that place investment restrictions on TRAN proceeds and certain other amounts (“Gross Proceeds”)

• The Yield Restriction Rule prohibits investment earnings on unspent Gross Proceeds of tax-exempt obligations outside of a temporary period or another exception applying

• The Rebate Rule generally requires that investment earnings on investments acquired with Gross Proceeds of tax-exempt obligations be paid or rebated to the United States unless a temporary period or another exception applies

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• Yield-Restriction Rule

• Generally prohibits investment of proceeds in higher yielding investments

• 13-month temporary period during which proceeds do not have to be yield-restricted

• For TANs, the temporary period may be extended to two years if

• TAN is reasonably expected to be paid from tax revenues from one fiscal year

• TAN matures by the earlier of two years or 60 days after the last date for timely payment of taxes

• Even if an obligation qualifies for a temporary period to the Yield Restriction Rule, the Issuer may be required to rebate those earnings under the Rebate Rule

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• Rebate Rule

• Investment earnings on certain investments must be paid to the United States or the bonds become arbitrage bonds

• Six-month spending exception. Gross Proceeds spent within 6 months of the issue date of an issue

• Special “Six Month Safe Harbor” for TRANs

• The actual cumulative cash flow deficit exceeds 90% of the proceeds of the TRANs within six months after issuance of the TRANs

• The actual deficit is measured looking at all available amounts including a reasonable working capital reserve

• Another exception-Issuer on the date of issuance does not expect to issue more than $5 million or does not in fact issue more than $5 million in the calendar year

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TRANs: Formula Scenario

• Example:

• Projected revenues received on first day of the month

• Projected expenses, paid on the first of the month

• Carryover cumulative surplus from prior year is $2 million

• Reasonable working capital reserve is $1,650,000 (5% of prior year’s actual working capital expenditures)

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TRANs: Formula Scenario (cont’d)

Month Projected

Revenues

Projected

Expenses

Projected

Cumulative

Cash Flow

Actual Cash

Flow

Opening

Balance

$2,000,000, less

$1,650,000 working

capital reserve

N//A N/A $2,000,000

Month 1 $700,000 $1,300,000 ($250,000) $1,400,000

Month 2 $700,000 $12,000,000 ($11,550,000) ($9,400,000)

Month 3 $1,000,000 $17,000,000 ($27,550,000) ($25,250,000)

Month 4 $1,200,000 $2,000,000 ($28,350,000) ($26,050,000)

Month 5 $15,000,000 $4,000,000 ($17,350,000) ($15,650,000)

Month 6 $20,000,000 $3,000,000 ($350,000) ($332,000)



Month Projected

Revenues

Projected

Expenses

Projected

Cumulative

Cash Flow

Actual Cash

Flow

Month 7 $5,000,000 $3,000,000 $1,650,000 $1,418,000

Month 8 $1,500,000 $800,000 $2,350,000 $2,168,000

Month 9 $700,000 $1,200,000 $1,850,000 $1,568,000

Month 10 $850,000 $1,000,000 $1,700,000 $1,893,000

Month 11 $700,000 $1,000,000 $1,400,000 $1,458,000

Month 12 $1,000,000 $1,000,000 $1,400,000 $1,433,000

Month 13 $750,000 $700,000 $1,450,000 $1,358,000

Totals

$49,100,000 plus

$350,000 from

available revenues

at start $49,450,000

$48,000,000 N/A N/A



• Further dissection

• Note that under the Proceeds-Spent-Last Rule, the largest expected cumulative deficit and largest actual cumulative deficit occurs in Month 4

• Applying the expectations test, the highest cumulative deficit is $28,350,000, which is the largest permitted size of the TRANs issue

• For yield restriction, the temporary period is met and there should be no overissuance

• For rebate, the actual amount spent is only $26,050,000, which could, absent the safe harbor, cause a rebate obligation

• The TRANs safe harbor for rebate however would be met under the actual expenditures (excluding the reasonable working capital reserve, as required)

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Increased Liquidity for TRANs with the

Municipal Liquidity Facility


Municipal Liquidity Facility: Overview

• Purpose - Enhance liquidity of short-term municipal securities market

• Method Used

• Federal Reserve created special purpose vehicle (SPV) to purchase Eligible Notes from Eligible Issuers

• Department of Treasury initial equity investment in the SPV of $35 billion

• SPV may purchase up to $500 billion in Eligible Notes

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Municipal Liquidity Facility: Overview (cont’d)

• Authority to purchase Eligible Notes ends Dec. 31, 2020 unless Treasury and Federal Reserve Board extend

• There is a 10BP origination fee at the time of issuance; can be paid from proceeds

• BLX is the administrative agent coordinating review and purchase application

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• States

• Cities with populations of more than 250,000

• Counties with populations of more than 500,000

• Multi-State Entities

• Created by compact between at least two states and approved by Congress

• Acting under Compact Clause of Constitution

• Only one issuer per state, city, county, multi-state entities, unless Federal Reserve approves additional to facilitate assistance to political subdivisions and other governmental entities

• On behalf of entities – if approved by Federal Reserve – for purposes of managing cash flow of the on-behalf-of state, city, county, or multi-state entity

Municipal Liquidity Facility: Eligible Issuers

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• Must be solvent

• Unable to obtain adequate credit accommodations from other banking institutions

• Must provide evidence

• Does not mean can’t get a loan; considers terms on which such loan is available

• Required credit ratings by two or more nationally recognized statistical rating organizations (NSRO) :

• Tests on two dates, April 8, 2020, and at time of purchase (if drop in rating)

• Required rating when two or more ratings

• For Multi-State Entities: At least A-/A3 on 4/8 and BBB-/Baa3 on date of purchase

• For Other Issuers: At least BBB-/Baa3 on April 8 and BB-/Ba3 on the date of purchase

• If only one NSRO rating on April 8, may still be an Eligible Issuer if met the required minimum rating on April 8 as determined by that NSRO, and at the time of purchase, met the required rating, as determined by at least two NSROs

Municipal Liquidity Facility: Eligible Issuers (cont’d)

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Municipal Liquidity Facility: Eligible Notes

• TRANS, TANs, and BANs and other similar short-term notes

• Maturity no later than 36 months from issuance

• For tax-exempt notes, interest will be a fixed interest rate based on comparable maturity overnight index swap rate plus applicable spread based on average of credit rating

• For taxable notes, the rate is determined by taking the tax-exempt rate, as determined above, and dividing by .65

• New issuance only – no refinancings after Dec. 31, 2020

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• Proceeds must be used for

• Working capital problems arising from income deferral from extension of tax deadlines, reduction or deferrals of tax or other revenues, or increases in expenses related to and resulting from COVID-19; and debt service payments on obligations of the Eligible Issuer, its political subdivisions or other governmental entities

• Purchase notes of a political subdivision or another governmental entity of the relevant Eligible Issuer that will use the proceeds for similar needs

• Pay costs of issuance and origination fee

• Notes may be prepaid with approval of Federal Reserve

• Relevant legal opinions and disclosures are required

Municipal Liquidity Facility: Eligible Notes (cont’d)

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• Obligations must be secured by strongest security of Eligible Issuers for

publicly offered securities

• Depends on applicable constitutional and statutory provisions

• For other than Multi-State Issuers, typically must be general

obligations or backed by tax or other specified governmental

revenues

• For authorities, agencies, or other entity of a state, city, or county,

the Eligible Issuer must commit credit, pledge revenues, or

guarantee the Eligible Notes

• For Multi-State Issuers, parity with existing debt secured by senior

lien on such entities gross or net revenues

Municipal Liquidity Facility: Eligible Notes (cont’d)

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• Aggregate amount up to 20% of

• For states, cities, and counties, the general revenue from such entities own sources of general and utility revenue, determined as of fiscal year 2017

• For Multi-State Entities the gross revenue as reported in the audited financial statement for fiscal year 2019

• States may request that more be purchased to assist political subdivisions (broadly defined) and other governmental entities that are not eligible for the Facility

Municipal Liquidity Facility: Amount That May Be Purchased

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• May 19, Federal Reserve Issued Municipal Liquidity Application Materials

• Not first come, first serve program

• Eligible Issuer submits a Notice of Interest with required information

• Submit a Notice of Interest for each issuance of Eligible Notes

• MLF will notify Eligible Issuer when to submit an application

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Municipal Liquidity Facility


Thank You!

Sergio

MasvidalManaging Director

[email protected]

Vanessa

Albert LowryShareholder

[email protected]

Rebecca

HarrigalShareholder

[email protected]

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